Service sector decline points to an American economic reversal

Intermediate
  • U.S. Services PMI is at its weakest for three-years
  • The growth in new business is stalling
  • Job creation averaged 161,000 per month in 2019, cf. 223,000 in 2018
  • The re-election prospects of the president are taking a tumble

Meeting minutes from the Fed will be keenly watched in the week ahead for further indications as to the next steps to be taken on the monetary policy path. This comes at a time when the economic prospects are starting to look less optimistic.

The IHS Markit US Services PMI was confirmed at 50.9 in September 2019, versus 50.7 in the previous month. This signals one of the slowest increases in output for over three-years.

United States Services PMI

Figure 1: United States Services PMI     Source: Markit Economics

Figure 1 reveals that the expansion that was so lauded by President Trump is scarcely receiving a mention from the White House as it fades away.  What is worse, outstanding business contracted the most since April 2014, while employment fell for the first time since February 2010, and at the sharpest rate since the end of 2009.

To add to the concern, new business growth slipped further to the weakest level since data collection began in October 2009, as new business from abroad dropped at the fastest pace since 2014.

New Business Optimism

Figure 2: New Business Optimism     Source: Markit Economics

On the prices front, input costs fell for only the second time in the series history and is accompanied by firms, wary of the high price elasticity of demand held by the U.S. consumer, cutting their selling prices to remain competitive. Producer prices for final demand in the US rose 1.8% from a year earlier in August 2019, after a 1.7% increase in July. This is down from 2.4% year-on year in April.

Business expectations towards output over the year ahead ar now running at the second-weakest level in the series history as there are lingering concerns surrounding ongoing business uncertainty and gloomier global economic growth projections.

It seems that the market mood is for U.S. annualised growth to slow to 1.3%, from the Q2 reading of 2.3%. Now, one can contend that this is not a recessionary figure it does, however, represent a significant slowdown. Not good news as the next presidential election is just over a year away.

What will worry Trump and likely lead him to issue even more criticism of the Fed is the fact that slowdown signals are not only multiplying; they are gathering pace. Chain Store Sales decreased to $3.085 billion in July from $3.021 billion in June of 2019, this was the lowest since March this year.

The IBD/TIPP Economic Optimism Index in the US fell to 50.8 in September, the lowest since February, from 55.1 in the previous month. The Six-Month Outlook, which measures how consumers feel about the economy’s prospects over the next half year, tumbled 14% to 43.0; and the gauge of how Americans feel about their own finances in the next six months dropped 5.4% to 59.2. Also, a measure of Americans’ confidence in government, the Federal Policies component plunged 4.4% to 50.2 in September. Hardly a set of statistics that predict a re-election.

Manufacturing production decreased 0.4% in August over the same month in the previous year. Perhaps more worrying was the fact that only three of the 18 U.S. manufacturing industries reported growth last month.

We have become acutely aware of problems in the manufacturing base given the trade war with China and the EU. It has been exacerbated by slower global growth and the competitive disadvantage of a strong Dollar. The latest developments should add a sense of urgency to talks seeking a resolution to the US-China trade dispute and will keep the pressure on the Fed to ease monetary policy further.

Tariffs have caused confusion across the U.S. manufacturing base. Maybe the tariffs imposed by the Trump administration on billions of Dollars in imports will secure better trade deals, however, that result is still in the distance. Industry at large and manufacturing, in particular, is bleeding now.

What might comfort the president is news that the IHS Markit US Manufacturing PMI was revised slightly higher to 51.1 in September 2019 from a preliminary 51.0 and compared to the previous month’s 10-year low of 50.3. The latest reading was the highest since April, but still signalled a modest overall improvement in manufacturing sector business conditions.

One cannot be complacent for employment growth in September slowed to 135,000, well below the 2018 average of 214,000. There were gains in health care, +39,000 and in professional and business services +34,000, but there was a contraction of 2,000 jobs in manufacturing.

U.S. Manufacturing Employment Changes

Figure 3: U.S. Manufacturing Employment Changes     Source: Bureau of labor Statistics

The picture tells a compelling story as 43% of the manufacturing jobs created in Trump’s current term have now been lost.

From the perspective of the economy and the election in November next year the critical issue is that job creation is slowing. There is a sense of rising caution over adding to the payroll.

For President Trump, this is bad news piled on top of his impeachment concerns. If businesses. Large and small pull back any further, unemployment will begin to rise and Trump’s economic miracle will fade along with his re-election prospects.

Stephen Pope

Macroeconomic Strategist

Stephen Pope is the Managing Partner of Spotlight Group. He has worked in the world of finance since 1982 and has performed d...continued

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